Discuss the Concept of Outsourcing, Reason Behind Outsourcing and Its Challenges.

Discuss the concept of outsourcing, reason behind outsourcing and its challenges.

a) Definition

The concept of outsourcing came from the American terminology “outside resourcing”, meaning to get resources from the outside. The term was later used in the economic terminology to indicate the use of external sources to develop the business, which typically were using their internal resources. Outsourcing is the process by which a company contracts another company to provide particular services. Momme (2000) defines outsourcing as the process of establishing and managing a contractual relationship with an external supplier for the provision of capacity that has previously been provided in-house.

Greaver (1999) asserts that outsourcing is of a strategic nature and that the decision-making process of a company should take this into account. He goes on to define outsourcing as the act of transferring some of company’s recurring internal activities and decision rights to outside providers, as set forth in a contract. Because the activities are recurring and a contract is used, outsourcing goes beyond use of consultants. As a matter of practice, not only are the activities transferred, but the factors of production and decision rights often are, too. Bandor-Samuel (2000) concurs and insists that the key to the definition of outsourcing is the concept of transfer of control, i.e. outsourcing thus takes place when an organization transfers the ownership of a business process to a provider. It is the transfer of ownership that defines outsourcing and often makes it such a challenging, painful process.

Fan (2000) states that outsourcing is a contractual agreement between the user and one or more providers to provide services or processes that the user is currently providing internally. He states that the fundamental difference between outsourcing and any other purchasing agreement being that the user contracts-out a part of their existing internal activity. Embleton and...